European Central Bank officials remain calm about the turmoil in the French market and have not considered using crisis tools
European Central Bank officials remain calm about the turmoil in the French market, believing that there is no need to panic. The rise in bond yields in France and Germany has led to market turbulence, but policymakers believe that the situation is still under control and have not discussed crisis tools. With the upcoming European Parliament elections in France, political uncertainty has raised concerns among investors, leading to a decline in the French stock market and bank stocks. The right-wing party National Rally in France is leading in the elections, proposing to lower the retirement age and implement protectionist policies, prompting rating agencies to downgrade France's rating. In addition, the bond spreads of Eurozone member countries such as Italy are also widening
According to the financial news app Zhitong Finance, it was revealed by informed sources that a European Central Bank official believes that there is no need to panic about the market turmoil that has swept through France in the past few days. Despite the significant increase in the yield spread between French and German 10-year government bonds, leading to a $200 billion market capitalization evaporation in the French stock market, policymakers still see this market turmoil as under control. As of Friday, policymakers have not even considered discussing crisis tools.
It is reported that the five-yearly European Parliament elections will take place from June 6th to 9th. French voters will elect 81 representatives to the European Parliament on June 9th. Due to the low support rate for the ruling party in France compared to the far-right party, Macron announced the dissolution of the National Assembly that evening and prepared for a new National Assembly election. The first round of voting is scheduled for June 30th, with a possible second round of voting on July 7th.
French Finance Minister Le Maire warned that if the far-right wins the early National Assembly elections in the coming weeks, France faces the risk of a financial crisis. Currently leading in opinion polls, the far-right party National Rally led by Le Pen is calling for a reduction in the retirement age and adopting a protectionist "France First" economic policy. The National Rally promises to cut electricity prices, increase the value-added tax on natural gas, and increase public spending—despite France's already high public debt levels. Rating agency S&P Global recently downgraded France, stating that the policies advocated by the National Rally could impact France's credit rating.
Political uncertainty has led to the largest single-week increase in the premium required by investors to hold French government bonds since 2011. Meanwhile, the French CAC 40 index has fallen by 5.6% so far this week, erasing gains for the year and marking the largest weekly decline since March 2022. Bank stocks plummeted, with the three largest banks in France—BNP Paribas, Credit Agricole, and Societe Generale—seeing their market values drop by 10%-15% this week, the largest decline since the banking crisis in March 2023.
Market concerns are not limited to France, as bond spreads in other Eurozone member countries like Italy are also widening. For the European Central Bank, any prospect of spreading turmoil may evoke memories of the Eurozone sovereign debt crisis a decade ago. If the situation spirals out of control and forces the ECB to consider using one of its crisis tools, the ECB will face a dilemma. Given the size of France as the Eurozone's second-largest economy, the ECB may need to intervene on an unprecedented scale, with any action requiring compliance from the next government.
The last time ECB officials had to resort to emergency measures was two years ago when the prospect of impending rate hikes led to a surge in Italian government bond yields. In June 2022, ECB policymakers took swift action in response to the Italian bond crisis, reaching an agreement within days on a new crisis tool aimed at preventing Eurozone fragmentation—the so-called Transmission Protection Instrument (TPI) The creation of this tool and the existence of other tools may be a guarantee for policymakers to remain optimistic and observant.
However, recent market turmoil has led investors and analysts to discuss more about the conditions under which TPI may be activated, although many are highly skeptical. Holger Schmieding, Chief Economist at Berenberg Bank, said, "If serious fiscal mistakes in France lead to a significant widening of yield spreads, the European Central Bank may not be willing to use this tool immediately." He believes that this will trigger "intense controversy" within the European Central Bank and the European political circles.
Isabel Schnabel, a member of the Executive Board responsible for market operations at the European Central Bank, stated in an early June speech on fiscal and monetary policy that TPI is "only used for countries pursuing sound and sustainable fiscal and macroeconomic policies." She emphasized that the central bank "cannot use this tool to address sustained tensions caused by national fundamentals."
When asked about the situation in France, European Central Bank President Lagarde said on Friday that she did not want to comment on the domestic political situation in France. She said, "I just want to say that the European Central Bank has a responsibility to fulfill its mission, control inflation, and bring it back to target levels. That's what we are going to do."